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LOOK AT TENANTS WHEN DOING DUE DILIGENCE ON COMMERCIAL PROPERTY

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate on Thursday, January 25, 2018.

Every buyer of multi-unit commercial property has (or should have) an extensive list of items that he or she wants to see as part of the due-diligence process.

However, when you’re focused on examining leases, warranties and records of repair, it’s easy to overlook one key item: the existing tenants. There’s information that you shouldn’t overlook if you want to make sure that the income from the property is really as stable as it seems on paper.

Here are two questions you need to ask.

1. Are there any chronic late-payers among the tenants?

This is an important factor that may not be readily apparent if you aren’t looking for it. It is something, however, that the owner will likely know — but don’t expect him or her to offer up the information unless you ask.

If there are chronic late-payers among the tenants, you need to adjust the anticipated cash flow from the property downward automatically. This is true even if the money is always eventually turned over. A chronic late-payer affects your bottom line when it comes to a secure and stable income.

2. Who makes up the property’s tenant base?

It’s also important to look into who makes up any significant portion of the property’s tenant base. Then you have to take into consideration any external political or economic factors that may impact those tenants in the foreseeable future.

There’s a certain amount of guesswork that goes into this part of the due diligence because you have to gauge how serious a threat those external factors are at the time you purchase. That means having a fair idea of market conditions and other factors both here and in the global market.

For example, if your tenant’s business depends a lot on the local Hispanic community, the current political atmosphere surrounding immigrants in the United States could dampen that tenant’s business if the community takes a serious hit from the Department of Immigration and Customs Enforcement (ICD).

Similarly, if you have a tenant whose business relies on the stability of the market in Venezuela, economic conditions in that country could suddenly throw them into bankruptcy. That, in turn, would make the property less profitable for you — just as suddenly.

Commercial real estate can be wonderful investment — but your due diligence has to be thorough to know a good deal from a bad one.

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ZILLOW IS SUED FOR VIOLATING ANTI-TRUST LAWS

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate on Friday, January 19, 2018.

Is Zillow unfairly letting some of its partner brokers drop the “Zestimate” values of certain pieces of real estate in order to scare buyers away from the competition?

A New Jersey group thinks so. It’s suing Zillow for what is essentially a violation of anti-trust laws and unfair competition.

Zillow’s brand is reliant on its marketing itself as a transparent tool that any buyer or seller can use to get a somewhat realistic value of a property. It does, however, offer the disclaimer that its prices aren’t necessarily accurate. Yet, buyers who are looking for houses often see the Zestimate immediately below a home’s list price.

When the discrepancy is small, that might not be any big deal. When the discrepancy is thousands — or even millions — of dollars apart, that is likely to make buyers run the other direction.

Which is exactly what the New Jersey group says happened when it listed a mansion overlooking a cliff at around $7.8 million. Zillow valued it at less than $4 million instead.

Zillow was the first website to give consumers the ability to see real estate values for themselves, granting easy access to things like recent sales in a neighborhood and current listings. However, the Zestimate algorithm that computes a home’s value can be easily skewed — and there are real estate professionals who believe that Zillow is a nightmare to their trade.

If a real estate broker is a Zillow partner, he or she can move the Zestimate or alter it if it reads too low. Nonpartner brokers don’t have that option. That’s the basis for the unfair competition suit because Zillow allows those who partner with the company a competitive edge with consumers who take the site’s property value estimations as gospel.

While it remains to be seen how this suit will turn out, so far Zillow has weathered previous claims of unfair play because it has always been clear that it is only one data point out of a whole consumers should consider.

Perhaps the best lesson that can be taken from the whole thing is that there’s simply no replacement — for now — for professional real estate advice.

Source: GeekWire, “Zillow sued over how it displays Zestimate home valuation tool in some partner listings,” Nat Levy, Jan. 16, 2018

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SUBLEASING COMMERCIAL SPACES

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in blog on Thursday, January 18, 2018.

A sublease is a rental agreement between a tenant and a subtenant who will be renting out a portion, or all, of an already rented space from the current tenant. The subtenant pays rent to the tenant, now the sublessor, who is responsible for the rent payments to the original landlord. For small business owners looking to rent a small space, subleasing can be a more affordable option. However, as with any lease, there are pros and cons which the renter should consider carefully before signing a lease.

Pros of subleasing

Subleasing a space can be cheaper than renting an exclusive space and the affordability makes it appealing for new business owners. A sublease can be easier to obtain, without all the credit requirements of a standard commercial lease. Generally, sublease rates are a flat rate fee and more straightforward.

Renters only looking to rent a small space may be drawn to a sublease, allowing them to only rent the amount of space they need. If the sublessor wishes to move before the original lease is up, the tenant has the option to rent the entire space. Also, most sublease spaces are turnkey ready.

Depending on the building location and set up, subleases can provide access to common areas, storage rooms and other shared spaces at a reduced cost. Tenants may also be able to use existing office technology, such as a fax machine or copier. Additionally, a sublease may also give you access to internet service and security systems.

Subleasing pitfalls

Some of the issues with subleasing arise simply because you must go through the sublessor, who then must reach out to the landlord. This can cause delays for any maintenance needs. Going through an unresponsive middleman can be frustrating when you need something fixed.

Also, when subleasing a space you sacrifice privacy. You are limited by however the space is decorated and laid out. Subleasing from similar professionals can help with this problem, since they likely have similar needs.

When reviewing a sublease, make sure to ask to review the original lease as well. The sublessor may attempt to pass along unfavorable lease terms, such as fees, to you. You will also want to make sure the original lease permits subleasing. If the sublessor defaults on their loan, you could lose the leased space even if you were paying the sublessor.

A lease, even a sublease, is a binding legal document. Before signing, review all the terms and get clarification on anything you do not understand. Don’t get stuck in a subpar sublease simply because you didn’t understand what you were signing.

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SHORT SALES CAN MAKE A GOOD BARGAIN

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in commercial real estate acquisitions & dispositions on Thursday, January 11, 2018.

Many real estate purchasers shy away from short sale properties because they hear a lot of third-hand horror stories.

Short sale investment properties can be a bargain, especially in areas where real estate prices were inflated at one point but have now fallen. You can also simply get lucky and happen across a short sale in a coveted location.

Short sales properties are those being sold for less than their mortgage’s total value. The sale is allowed only because the seller is undergoing a hardship that makes it the reasonable thing to do and the property’s equity is too low to cover both the mortgage and the costs associated with selling it (like realty fees).

For example, if a commercial property goes up on short sale, the owner may have been a corporation that dissolved due to a death or legal trouble, or gone bankrupt. The seller has to have permission from the bank to sell at the reduced price — so there’s no fear on your end if you’re the buyer.

If you decide to make an offer, you may have to wait a little longer than you would for a private seller alone to answer — both the owner and the bank have to agree to the sale. While the owner obviously wants to unload the financial burden, keep in mind that the bank is still going to want fair market value.

This is where it pays to do your research carefully. The property may end up with multiple offers if it is in an attractive area and at a good price, so don’t offer the minimum unless you really think that’s all it is worth. Before you write your offer, make sure that you:

  • Research comparable properties that have recently sold in the area
  • Note any faults or problems with the property that could reduce its value (such as poor maintenance)

Then, be prepared to wait. While you can get approval in a matter of weeks, a short sale isn’t for you if you’re in a hurry — expect 3 to 4 months before the agreement goes through.

Sometimes, a short sale can be significantly eased through the services of an attorney that’s familiar with the process. If you’re concerned about closing the deal, consider seeking advice on property acquisitions and dispositions.

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FIVE COMMON MISTAKES IN COMMERCIAL LEASING

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in blog on Tuesday, January 9, 2018.

When signing a lease for a commercial property, it’s important to be as prepared as possible. You’re making a significant financial commitment, and in order to achieve a deal that best suits your business interests, you need to know what you’re getting into.

As crucial as due diligence is to signing a commercial lease, however, it can also be helpful to know what not to do. Here are five commonly made mistakes in commercial leasing:

1. Getting locked into a long-term deal

Depending on your line of business, a long-term lease may not be a practical solution. For example, a high growth company would be ill-served to be locked into a multi-year lease for a space it’s outgrown. Conversely, many businesses will end up underusing their space for portions of their lease term, so in many cases, longer leases simply don’t make sense.

2. Failure to consider the tenant improvement allowance

Before you put ink to paper, be sure that you’re satisfied with the landlord’s tenant improvement allowance. This is the amount they’re willing to spend in order to prepare the space for your business. You’ll want to consult with contractors and IT specialists to make sure that this budget aligns with your vision.

3. Absorbing build-out costs

It’s possible that the space you’re leasing is in a bare, minimalist state. Landlords will often strip down commercial properties once a tenant vacates, and while it gives you something of a blank canvas to work with, the build-out costs can be exorbitant if you’re shouldering a portion of them.

5. Signing the demolition clause

If your landlord decides to tear down and redevelop the commercial property you’re leasing, your agreement could go up in smoke, provided you signed a demolition clause. By agreeing to certain demolition and relocation terms, the landlord can terminate your lease, which could be an expensive headache for your business.

4. Poor negotiation tactics and not using the leverage available to you

A commercial lease can be a lengthy, nuanced contract, and in order to reach a satisfactory agreement, proper negotiation is a must. Aside from things like not taking the bait of a better rate for a longer lease, there are concessions you can get from your landlord, and if you’re a novice at these deals, using a broker or experienced attorney can be of great help.

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WHAT TO KNOW BEFORE YOU AGREE TO LEASE TO A WIND FARM

On behalf of Michael Brooks of Law Offices of Michael A. Brooks posted in land use & zoning restrictions on Friday, January 5, 2018.

Wind farming offers a clean, renewable source of alternative energy. It also offers farmers and other owners of plots of land in just the right location a way to make some additional passive income.

However, leasing your property to a wind farm isn’t always a simple matter. A mistake on your part could actually affect your ability to use your property as you see fit for a long time, hinder inheritances and create ongoing headaches nobody needs.

While it’s worthwhile to seek legal advice in advance of any agreements about commercial land use, here are a few pieces of information that should help you navigate the new terrain:

1. If you’ve been approached by a wind farm, contact your neighbors. The odds are good that they have been contacted too — or will be soon. If you bargain jointly, you’ll increase your negotiating power. Since the company has significant resources on its side, it’s time to pool yours.

2. Call in the experts so that you understand exactly how the wind farm will affect your active growth operation. If the land is lying fallow and you don’t expect to use it, you may not have any issues. However, if the land is in use, you need to know exactly how the turbines, access roads and substations are going to disrupt any of your field’s configurations, water supply, drainage or planting and harvesting machine access.

3. Spell out the rights you have to use the land around the turbines carefully. In addition, the lease needs to state what compensation you’ll receive if the wind farm’s operation (or some failure of operation) destroys any part of your crops, products, livestock or property.

4. Consider the time limit of the lease carefully. It isn’t uncommon for a wind farm to lease land for 50 years or longer. That’s the only way they can recoup their investment and earn a significant profit. The odds are good that this will affect your heirs — and maybe their heirs, depending on your age. You may need to hold some serious discussions with your family to make a decision.

5. Don’t forget debts, lenders and liens. If you have a debt on the land, your lender may have to give permission for the wind farm. The lease should also address any liens on the property — including those brought on by the wind farm.

Source: National Wind Watch, “Five questions to ask before signing a wind-energy lease,” Liz Morrison, accessed Jan. 05, 2018

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